Why Series 7 Brokers Cannot LEGALLY Be Client Fiduciaries Without the DOL Fiduciary Rule.

March 01, 2017

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The key issue is that the Series 7 exam is technically the “General Securities Representative Examination”. This name is important because it indicates that ultimately, the licensee is acting as a representative of the broker-dealer. In other words, a Series 7 license allows an individual to represent the broker-dealer in the sale of securities products to clients. This is why Series 7 licensees are referred to as “Registered Representatives” of a particular broker-dealer.

And as a representative of the broker-dealer, the broker technically has an obligation to serve the broker-dealer, not the client. This is why a broker-dealer can terminate a broker for outside business activity, or for soliciting a client to move with them to a new broker-dealer. In fact, technically the client isn’t even a client of the broker’s; it’s a client of the broker-dealer’s, and the broker is just the sales representative. That’s why it’s illegal for the broker to take any client information when changing broker-dealers.

Of course, in today’s environment, the overwhelming majority of those working at a broker-dealer are dual-registered as a sales rep under the broker-dealer and working under a corporate RIA. Nonetheless, anytime the broker sells a product and earns a commission (i.e., using the Series 7 license), the broker is not a fiduciary, but a sales representative! Notably, these advisors are fiduciaries when they give under the RIA and are paid an advisory fee. But they are still effectively wearing two hats, and cannot be full fiduciaries while the Series 7 hat is on!

"...anytime the broker sells a product and earns a commission (i.e., using the Series 7 license), the broker is not a fiduciary, but a sales representative! "

And the reason all of this matters is because, if someone wants to take money from their clients by selling high-commission products to anyone they can, the suitability standard that applies to brokers is a relatively low caveat-emptor bar. But a fiduciary standard doesn’t legally permit such behavior. That’s why it matters — it’s not about the already-good advisors who are doing the right thing, but about raising the bar to reduce the risk of bad brokers who try to do the worst they (legally) can. Which is why the focus on fiduciaries vs non-fiduciaries has morphed into a discussion of RIAs vs broker-dealers. Because the “easiest” way for the media to recommend avoiding a bad non-fiduciary (broker) is simply to recommend avoiding all of them.

The bottom line, though, is to recognize that Series 7 licensees are legally sales representatives. Ultimately, until brokers either voluntarily move to a new business model or are held to new DoL fiduciary standards, the reality will remain that you can’t be a full fiduciary with a Series 7 license!

Article written by Michael Kitches, kitches.com on February 16, 2017.


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